Competitiveness and Private Sector Development

This series of publications addresses different aspects of private sector development in non-OECD regions, including Latin America and the Caribbean, the Middle East and North Africa, Southeast Asia, South East Europe and Eurasia. Reports provide recommendations at the national, regional and sector level to support countries in improving their investment climate, enhancing competitiveness and entrepreneurship, raising living standards and alleviating poverty.

The combined effects of the economic crisis and the recent popular uprisings in parts of the Middle East and North Africa have brought social and economic challenges back to the centre of attention of policy makers. For governments searching to create jobs, to satisfy the growing energy demand of their populations and to diversify their economies, the appeal of renewable energies is strong. However, the right policy framework and support need to be put in place if the region wants to attract private investment in the sector and reap the benefits of its favourable resource endowment, especially as regards solar and wind energy.

This report makes the case for a stronger deployment of renewables in the Middle East and North Africa and identifies the appropriate support policies required to stimulate the necessary private investment. An assessment of existing policy frameworks in the region and examples from OECD good practice are used as pointers to help guide policy makers in their choices.

The analysis contained in this report suggests that support policies targeting the life cycle of renewable energy projects such as feed-in tariffs and power purchase agreements are more effective and less distortive than policies subsidising the initial investment, such as cost reductions. The optimal incentive scheme provides investors with stability through a guaranteed but declining minimum return while imposing enough market risk to foster technological progress.

The combined effects of the global financial and economic crisis and the recent popular uprisings in parts of the Middle East and North Africa have brought social and economic challenges to the centre of attention of policy makers. For governments seeking to stimulate economic growth in order to create jobs, to satisfy the growing energy demand of their populations and to diversify their economies, the appeal of renewable energies is strong. In the wake of the International Conference on Renewable Energies in 2004, most Middle East and North Africa (MENA) countries set targets for renewable energy deployment. Following on from the European Union’s 2020 energy plan, and in the face of rising environmental concerns, there has been an increase in multilateral initiatives in support of the development of renewables in the Middle East and North Africa. However, the right policy framework and support need to be put in place if the region wants to attract private investment in the sector and reap the benefits of its favourable resource endowment, especially as regards solar and wind energy.

Between 2001 and 2011, world consumption of primary energy rose from 9 434 million tonnes of oil equivalent (Mtoe) to 12 275 Mtoe, an increase of 30.1%. The International Energy Agency (IEA) forecasts an increase in global energy demand from 12 132 Mtoe in 2009 to 16 961 Mtoe in 2035 – an increase of 33.6%. In its pessimistic scenario, assuming that current policies are maintained with no new climate mitigating elements added, energy demand is forecast to increase by 51% by 2035.

The Middle East and North Africa regionThis document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. (MENA) is rich in renewable energy sources, not least solar energy; yet the renewable energy power sector remains underdeveloped. The share of renewable energy in the total energy mix in the region is estimated at just 4% by the International Energy Agency (IEA).

Worldwide energy demand is rising, and even more rapidly in the MENA region. The region’s geographical location provides great potential for the development of renewable energy (in particular for wind and solar) and export of any surplus energy to Europe. Additional benefits include direct and indirect increases in employment, rural electrification and the empowerment of women. MENA economies would also benefit from technology transfers, more diversified economies and a better environment. However, the development of these technologies is hampered by their high cost and imperfect market conditions. This can be addressed by using investment incentives and support measures specially targeted to the development of renewable energy.

Investors usually encounter several barriers to investment in renewable energy in the MENA region and elsewhere; governments can help overcome them by using various support measures. Key barriers include a lack of profitability (due to the high cost of the technology used, and government subsidy of utilities), the high risks associated with long-term investment, such as client risk, political and regulatory risks, market risks and the risks of new technology, capital market barriers, and existing policy instruments which favour fossil fuels. The lack of access to finance by potential investors can be attributed to the long-term nature of projects and the high up-front payment and risks associated with them. Barriers can be removed through regulatory, financial or fiscal incentives. However, policy makers need to be aware of the negative externalities associated with the use of certain support measures if they are not carefully targeted.

Support for renewable energy development in OECD countries most often takes the form of feed-in tariffs and net metering as these are measures which address the issue of cash flow during a project’s life cycle. To help decision makers attract private investment and limit public expenses, an optimal mix of support mechanisms must be selected to guide private investment to the renewable energy sector, ensuring profitability for the investor and minimum cost for the government. These measures are specific to renewable energy projects and have been developed specifically to attract investors to renewable energy power generation. In the MENA region, a number of countries are implementing some support measures, but they vary in consistency across the region. A perfect incentives scheme as such does not exist. The optimal incentives scheme for a country needs to take into account national circumstances such as a country’s renewable energy potential, its energy policy framework, the existence of non-economic barriers, the degree of market liberalisation and its energy system infrastructure. These exogenous features are all likely to influence the effectiveness of any national incentive scheme.

The design and implementation of support mechanisms and investment incentives vary across countries and there is no single optimal incentive scheme for renewable energy projects. The choice of the right policy tool for attracting private investors is crucial as public resources could be unnecessarily wasted if an inappropriate incentive is implemented. Cash-flow incentives have a higher impact on the decision to invest in renewable energy power generation. Among the incentive schemes identified in the report, power purchase agreements are considered most useful, in the right conditions. Various investment incentives such as feed-in tariffs, net metering, competitive bidding, power purchasing agreements and quotas, or combinations of these, are evaluated for their effectiveness.

This report attempts to provide an overview of the existing support mechanisms for investment in renewable energy power projects in the Middle East and North Africa region (MENA). The study shows that there are significant differences in renewable energy policy among the countries surveyed (Algeria, Egypt, Jordan, Morocco, Tunisia and the UAE). Support mechanisms and incentives available to investors vary across the countries, while domestic application of existing policies is not always clear and transparent for businesses.

Algeria’s Decree on the Diversification of Power Generating Costs adopted in 2004www.mem-algeria.org/francais/index.php?page=decret-executif-couts-de-diversification-de-la-production-d-electricite-2. introduced FiTs to support the private production of electricity from renewable energy sources, but has not yet been implemented. The types of renewable energy covered include hydropower, wind power, geothermal and solar power and electricity from waste. The Commission of Electricity authorises power companies to produce electricity from renewable energy up to a capacity of 50 MW. The authorities bear the additional costs related to the use of these technologies through FiTs.

A similar system exists in Tunisia. Law 2009-7 on Energy Efficiency allows companies in the industry, agriculture and services sectors to produce electricity from renewable energy for their own consumption and sell the excess produced to the public utility Société Tunisienne de l’Électricité et du Gaz (STEG).

The following table provides an overview of the Mediterranean Partner Countries’ (MPCs) progress on policies and regulation for Renewable Energy Sources (RES), using a colour code, indicating for each country and item the level of progress.